HATTEM v. SCHWARZENEGGER

May 26, 2004.

ALEX HATTEM, solely in his capacity as a participant in a pension plan funded by by The Long-term Investment Trust; J.P. MORGAN CHASE BANK, not in its individual capacity but solely in its capacity as trustee for The Long-term Investment Trust; AT&T INVESTMENT MANAGEMENT CORPORATION, not in its individual capacity but solely in its capacity as The Long-Term Investment Trust's "Named Fiduciary," Plaintiffs, -V- ARNOLD SCHWARZENEGGER, in his Official Capacity as Governor of the State of California; GERALD A. GOLDBERG, in his Official Capacity as Executive Officer of the California Franchise Tax Board; DESMOND PRESS in his Official Capacity as Program Manager of the California Franchise Tax Board, and DOES 1-10, Defendants

The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

Plaintiffs, respectively a participant, a trustee and a fiduciary in a
pension plan funded by The Long-Term Investment Trust ("Trust"), allege
that California statutes that tax the unrelated business taxable income
of the Trust are preempted by the federal Employee Retirement Income
Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq.,
and seek declaratory and injunctive relief and a refund of taxes
previously paid under the relevant state statutes. Defendants move to
dismiss, arguing that the action is barred by the Eleventh Amendment. The
motion will be granted in part and denied in part.

The Eleventh Amendment to the United States Constitution provides that
"[t]he Judicial power of the United States shall not be construed to
extend to any suit in law or equity, commenced or prosecuted against one
of the United States by Citizens of another State, or by Citizens or
Subjects of any Foreign State." U.S. Const. amend. XI. While the plain
language of the Amendment applies only to suits brought by citizens of
other states, it is by now clear that the Supreme Court's Eleventh
Amendment jurisprudence bears no relationship to the provision's text.
See, e.g., Alden v. Maine, 527 U.S. 706, 713 (1999)
(states' immunity from suit "neither derives from, nor is limited by, the
terms of the Eleventh Amendment"); accord Fed. Mar. Comm'n v. S.C.
State Ports Auth., 535 U.S. 743, 788 (2002) (Breyer, J., dissenting)
(asserting that "interpretive principle" underlying Supreme Court's
Eleventh Amendment jurisprudence "has no logical starting place").
Rather, notwithstanding the text of the Eleventh Amendment, the Supreme
Court has declared a general principle of state immunity from private
suit in federal court  whether by "Citizens of another State,"
"Citizens or Subjects of any Foreign State," or a state's own citizens
 unless the State has consented to suit or Congress has explicitly
and constitutionally abrogated the State's immunity. See, e.g.,
Lapides v. Bd. of Regents of Univ. Sys. of Ga.,
535 U.S. 613, 618-20 (2002); McGinty v. New York, 251 F.3d 84,
90-91 (2d Cir. 2001).

Congress lacks authority, however, to abrogate the sovereign immunity
of the States under the Commerce Clause. Seminole Tribe of Florida
v. Florida, 517 U.S. 44, 65-66 (1996). Accordingly, ERISA, which was
adopted under the Commerce Clause power,*fn1 cannot have abrogated
California's Eleventh Amendment immunity, and plaintiffs do not claim
that California has consented to suits such as theirs. The state's
immunity applies to its officers sued in their official capacities, where
the lawsuit seeks monetary damages. Edelman v. Jordan,
415 U.S. 651, 663 (1974); Ford Motor Co. v. Department of Treasury,
323 U.S. 459, 464 (1945). It does not, however, preclude actions against
state officials sued in their official capacities for prospective
injunctive or declaratory relief. Ex parte Young, 209 U.S. 123,
159-60 (1908); Verizon Md., Inc. v. Pub. Serv. Comm'n of Md.,
535 U.S. 651, 664 (2002); Edelman, 415 U.S. at 664-65;
Ying Jing Gan v. City of New York, 996 F.2d 522, 529-30 (2d
Cir. 1993).

Plaintiffs' complaint centers on the argument that the tax is preempted
by ERISA, and principally demands declaratory and injunctive relief,
which are not barred by the Eleventh Amendment. See Commonwealth
Edison Co. v. Vega, 174 F.3d 870 (7th Cir. 1999) (Posner, J.)
(Eleventh Amendment does not bar suit for injunctive relief against state
official based on ERISA preemption). The demand for a refund, which appears in only
one sub-paragraph, is easily stricken. Thus, the well-established
principles set forth above require that plaintiffs' action must be
dismissed insofar as it seeks tax refunds, but not insofar as it seeks
declaratory and injunctive relief. At least two circuits, faced with
cases similar to this, have reached exactly this result. See Darne
v. State of Wisconsin, 137 F.3d 484, 487-88 (7th Cir. 1998);
Thiokol Corp. v. Department of Treasury, 987 F.2d 376, 381-82
(6th Cir. 1993);*fn2 see also Edelman, 415 U.S. at 664-65
(accepting "prospective portion of the [district] court's order under
review" but overturning the "retroactive" portion ordering monetary
payment).

Nevertheless, both sides in this action press untenable positions that
are inconsistent with these clearly established principles. Defendants
argue that the entire lawsuit, and not merely the demand for monetary
relief, must be dismissed. As defendants correctly note, "suits against
states and their officials seeking damages for past injuries are firmly
foreclosed by the Eleventh Amendment." Ward v. Thomas,
207 F.3d 114, 119 (2d Cir. 2000). Defendants cite no authority,
however, nor do they make a reasoned argument, for the proposition
that including a demand for damages in a suit that otherwise seeks
available prospective relief against state officials requires a
court to dismiss the entire suit, rather than simply to strike the
demand for unauthorized monetary relief.*fn3 In fact, the authorities are clear that "[a]
federal court must examine each claim in a case" separately in order to
determine "if the court's jurisdiction over that claim is barred by the
Eleventh Amendment." Pennhurst State School & Hosp. v.
Halderman, 465 U.S. 89, 121 (1984): see also Wisconsin Dept. of
Corrections v. Schacht, 524 U.S. 381, 389-90 (1998) ("[W]here
original jurisdiction rests upon . . . `arising under' jurisdiction,
the Court has assumed that the presence of a potential Eleventh Amendment
bar with respect to one claim, has not destroyed original jurisdiction
over the case."). Thus, while plaintiffs' claim for monetary relief must
be dismissed, its inclusion in the complaint provides no warrant for
dismissing other claims that are not barred by Eleventh Amendment
principles.

Plaintiffs, even less persuasively, argue that their demand for a
refund of the tax payments is somehow consistent with the Eleventh
Amendment. Their argument is propped up by egregiously mis-cited
authority. After correctly citing Ex parte Young and
Verizon Maryland for the proposition that their demand for
prospective equitable relief against the state officials is permissible
(P. Br. 4-5), plaintiffs proceed to "distinguish" the unbroken line of
authority that precludes monetary relief in such cases on the ground that
none of those cases involved ERISA. (Id. 5 & n. 2.) They
provide no explanation, however, for the untenable notion that ERISA can
or did repeal a provision of the Constitution. Lacking any argument sounding in reason, plaintiffs resort to
authority, claiming that the proposition for which they contend is
established by "Second Circuit precedent" (id. 2), citing Travelers
Ins. Co. v. Cuomo, 14 F.3d 708 (2d Cir. 1993), rev'd sub nom.
New York State Conference of Blue Cross & Blue Shiled Plans v.
Travelers Ins. Co., 514 U.S. 645 (1995), and NYSA-ILA Med. and
Clinical Servs. Fund v. Axelrod, 27 F.3d 823 (2d Cir. 1994),
rev'd sub nom. DeBuono v. NYSA-ILA Med. and Clinical
Servs. Fund, 520 U.S. 806 (1997). Contrary to plaintiffs'
contention, neither of these cases, both of which in any event pre-date
Seminole Tribe, upholds a claim for a tax refund against
Eleventh Amendment challenge. The Second Circuit described
Travelers as a suit "to enjoin a practice violating ERISA." 14
F.3d at 714.*fn4 The Court held that such a suit was not precluded by
the Tax Injunction Act, 28 U.S.C. § 1341. Id. at 713-14.
Nowhere in the Court's lengthy opinion is there any mention of a claim
for monetary relief, or of the Eleventh Amendment.

In NYSA-ILA, the Court of Appeals dealt with the merits of an
ERISA preemption claim, after having noted that the plaintiffs sought
"declaratory and injunctive relief as well as restitution [of taxes] it
had previously paid." 27 F.3d at 826. But the request for declaratory and
injunctive relief adequately supported jurisdiction to address all issues
presented to the Second Circuit in the case, and the Court simply
reversed the District Court's conclusion that the tax was not preempted,
without discussing possible relief, mentioning damages, or addressing the
Eleventh Amendment. Id. at 828. The Supreme Court eventually reversed
this holding and dismissed the case on the merits. 520 U.S. at 815-16.
Thus, no award of damages was ever entered or sustained by any court in that case.*fn5

Accordingly, plaintiffs' claim that Second Circuit precedent permits an
award of monetary relief in a case such as this is completely devoid of
support. Plaintiffs have not cited, nor has this Court discovered, any
appellate case decided after Seminole Tribe that upholds a
claim for a tax refund on grounds of ERISA preemption against an Eleventh
Amendment challenge.*fn6 CONCLUSION

For the reasons stated, the defendants' motion to dismiss is granted to
the extent that plaintiffs' claim for monetary relief in the form of a
tax refund is dismissed. In all other respects, the motion is denied.

SO ...

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